Too close for comfort?

A big business carries a lot of sway in a small town. In a place the size of Murfreesboro, a major enterprise like publicly traded real estate investment trust National Health Investors Inc. naturally has connections with many people in the local business community.

But Tennessee's attorney general now wants to know more about some of those ties. It has opened an investigation into NHI's relationships with three nonprofit organizations that do business with it — charities led by board members who have been closely associated, in at least some instances, with NHI's corporate interests.

One of the nonprofits, Care Foundation of America, is now taking legal action against NHI after coming under the leadership of a new board of trustees. The foundation claims NHI manipulated sympathetic board members into business dealings that deprived it of $25 million over the past nine years.

Care Foundation and five subsidiaries filed for Chapter 11 reorganization in Nashville's bankruptcy court on Dec. 31. As part of the bankruptcy proceeding, they filed a complaint against NHI in an effort to recoup funds they say NHI wrongfully reaped by selling them six Florida nursing homes in 2000 at a price higher than they were worth.

NHI denies any wrongdoing. In a report to the Securities and Exchange Commission, NHI said it "intends to defend vigorously" against the foundation's legal claims. It goes on to state that an "unfavorable outcome" in the lawsuit or in Internal Revenue Service actions arising from Care Foundation's claims "could have a material adverse effect on NHI’s consolidated financial position, results of operations or cash flows."

Intertwined allegiances

A core issue in the dispute is just how independent Care Foundation and the other nonprofits were if their boards were made up entirely or mostly of NHI insiders. NHI refers to the charities in regulatory filings as "unrelated not-for-profit entities" with which it has entered into arm's-length contracts.

Those entities, however, hardly appear unrelated to the casual observer. As it has bought, financed or restructured the ownership of nursing homes in Florida, Massachusetts, New Hampshire, Texas and possibly other states over the years, NHI has arranged for nonprofits led by Murfreesboro residents to operate the homes.

Care Foundation's incorporator, in November 1999, was Richard F. "Ted" LaRoche Jr., then a senior NHI executive. Its initial directors were NHI corporate board member Robert T. Webb, John B. Morton and Mazell M. Tambornini. Morton and Tambornini were "close personal friends of the family of NHI's chairman, W. Andrew Adams Sr.," according to the lawsuit, and Tambornini was a longtime former employee of National Healthcare Corp., the Murfreesboro nursing home operator, also led by Adams, that created NHI in 1991.

When all of those directors resigned in 2006, W. Andrew Adams Jr. — son of the NHI chairman — and Melissa Oden became the foundation's only trustees. NHI has loaned $14.6 million to companies headed by Oden, and she has personally guaranteed those loans.

As soon as the attorney general initiated the probe early in 2008, Adams and Oden resigned, according to the complaint. A new slate of directors took over, led by Nashville entrepreneur James P. Earle III. The new board "did not learn of NHI's wrongful conduct until after its appointment in or about June 2008," the lawsuit says.

The parties to the case have not identified the other two organizations under state scrutiny, but public records show at least one other nonprofit corporation whose board overlaps with the original board of Care Foundation. That charity is ElderTrust of Florida Inc., a Tennessee corporation that operates nursing homes financed or owned by NHI. Tambornini serves on its board. Its president, William T. Richmond, is part of an investment group holding about 6 million shares of NHI's stock, according to SEC filings.

The former Care Foundation board members take offense at the notion that they were "really just puppets," said Ernest E. Hyne II, with the Nashville law firm Harwell Howard Hyne Gabbert & Manner, which represents NHI. "They exercised independent judgment."

As for any social ties between trustees and the people in charge of NHI, Hyne stated: "I don't think that friendship alone means people cannot act independently."

Deal done in a hurry

The transactions at the center of the Care Foundation dispute took place at the end of 1999, amid a liability insurance crisis that contributed to the failure of a number of nursing homes across the country. NHI and NHC held $32.7 million in mortgages on the six Florida facilities whose owner had gone bankrupt.

In December 1999, the bankruptcy trustee learned that liability premiums on the homes would increase tenfold in the new year. He considered it imperative to sell or shut down the homes before the new costs kicked in. The trustee obtained an independent appraisal that valued the properties at $23.2 million — $10 million less than the bankrupt owner had paid for them in 1993.

Minutes of a meeting of Care Foundation's newly installed directors on Christmas Eve of 1999 show that LaRoche "advised the board that it had a unique opportunity to expand its portfolio of properties" by purchasing the Florida nursing homes for $32.7 million, with financing from NHI. The board members approved the sale on the spot.

On Dec. 30, an NHI subsidiary bought the homes out of bankruptcy for just under their appraised value of $23 million. The following day, the NHI entity sold the facilities to Care Foundation for $32.7 million.

In its legal action, Care Foundation accuses NHI of using its "abusive influence" over the board to orchestrate "an illicit financial scheme" resulting in the sale of the properties for $9.5 million above fair market value.

Hyne said the difference in prices can be readily explained. As part of the deal with the bankruptcy court, he pointed out, NHI had agreed to "subordinate" its $32.7 million in claims against the former owner, so that all other claims would be paid before NHI's. It was unlikely NHI would ever see a penny of that money.

NHI had been willing simply to pay $32.7 million, Hyne said, but the trustee asked to structure the deal differently for tax reasons. "It would not have mattered whether we paid $23 million or $32.7 million, because that's all of our debt," Hyne stated. "Nobody else would have gotten anything more, except the IRS."

The two sides also dispute whether the interest Care Foundation has paid NHI since 2000 has been above market rate and whether NHI extracted some $2.3 million in unreasonable fees from the foundation.

The Attorney General's office does not comment about ongoing investigations. Harwell Howard lawyer D. Alexander Fardon confirmed that NHI has received a civil investigative demand from the AG.

Former Tennessee Attorney General Paul G. Summers, now in private practice at Waller Lansden Dortch & Davis, brought the lawsuit on behalf of Care Foundation, along with Waller partners Paul S. Davidson and David E. Lemke.

A copy of the legal complaint and exhibits filed with it is available at this link.